Avoiding the natural resource curse: an optimal use of oil rents to reduce its potential negative effects upon economic growth

Crude oil is a commodity that is often traded between countries. When countries begin their commercial export of crude oil, their national economic statistics look very favorable. However, the experiences of several oil-exporting countries have shown a decline in their economic performance in the long run. Strong oil export revenues have long been speculated to be the key antecedent for the poor economic performance of oil-rich nations. This study has two main objectives. The first is to empirically identify the determinants of the natural resource curse; the second is to explore policy mechanisms to avoid the resource curse by addressing the robust oil export revenues in a manner that would not compromise a country’s economic performance. From a panel of 18 countries over the 2001 to 2017 period, this study found that petroleum natural resource abundance could have a negative relationship with real per capita GDP growth. Thus, oil-rich developing countries should be cautioned about the potential for high oil export revenues eventually cause a reduction in their real per capita GDP growth. This study contributed to the natural resource curse literature by its presentation of an alternate scenario for the management of natural resource funds. This study suggests that the PIH is not the optimal scenario for the management of natural resource funds as it induces a government to commence borrowing before the onset of the boom. When the boom comes to an end, inertia in public spending may cause the government to continue borrowing. This study proposes that the optimal approach for the management of natural resource funds is one in which a proportion of the natural resource rents is saved in a low risk–interest bearing natural resource fund, and the remainder is used to develop the productive capacity of the economy.